Climate Change in Retail Leasing
By: Scott Klion
Yogi Berra once never said, “Making predictions is tough, especially about the future.” Nevertheless, I would like to share with readers my forecast as to how the environment in which retail lease negotiations are conducted will change in the wake of the COVID-19 pandemic and related business shutdown orders, income stream interruptions, overnight company bankruptcies, deflated rental values, and lingering consumer fears.
Delivery of Possession. Before, if the subject premises were not available for immediate possession, the parties would negotiate what physical conditions must exist in order for the space to be deemed ready for occupancy (e.g., vacant, broom clean, landlord’s work substantially complete, no building violations or open permits to delay construction). The tenant would thus assume most or all of the risk if, due to external factors, it would be impractical or impossible to commence construction or open for business upon delivery. Now, I expect during lease negotiations that tenants will try and be able to shift some of that risk back to the landlord so that the tenant is not forced to take possession in the middle of a pandemic, government shutdown, or other “major” disaster (e.g., super storm damage to the surrounding infrastructure, violent civil unrest in the local community, catastrophic disruption of a critical banking or communication systems).
Rent Commencement. Before, if a tenant needed to fit-out the space before opening for business, the parties would negotiate how much time the tenant would have to complete construction and open (e.g., 90 days), the extent to which that time would be rent-free (e.g., base rent or base rent plus side charges), and when that partial or total rent-free period would begin (e.g., upon delivery, upon landlord plan approval, or upon government permitting). The tenant would thus assume most or all of the risk if, due to delays beyond its control, it was unable to open to the general public before the rent-free fit-out period expired. Now, I expect during lease negotiations that tenants will try and be able to shift some of that risk back to the landlord so that a tenant’s fit-out period is tolled in the event construction or opening is delayed due to a pandemic, government shutdown or other major disaster.
Open for Business. Before, during lease negotiations, it was assumed that both parties knew and agreed on what “open for business to the general public” meant with respect to Tenant’s operations in the premises. Now, because in connection with the COVID-19 pandemic certain retail operations were, for a time, limited by government mandate to curbside pick-up, off-site delivery and/or reduced occupancy, I expect during lease negotiations that the parties will not only expressly define the term “open for business” but also will define it differently based on the context in which it is used (e.g., rent commencement date, co-tenancy requirements, tenant improvement allowance payment, percentage rent breakpoint adjustment, kick-out sales threshold adjustment, continuous operating covenants).
Rent Abatement. Before, during lease negotiations, it was generally accepted that any abatement in rent would be limited to situations where the premises were rendered unusable or inaccessible due to physical damage to the space, structure and/or complex caused by a fire or other casualty and/or some action on the part of the landlord affecting the same. Now, I expect during lease negotiations that tenants will try and be able to obtain either an abatement or deferral in rent in the event their business is forced to close or is inaccessible for an extended period of time due to a pandemic, government mandate or other major disaster.
Force Majeure. Before, most force majeure clauses excused only the landlord’s performance or, if the clause applied to both parties, created an exception for (i.e., did not excuse) the payment of rent. Now, I expect during lease negotiations that (1) tenants will try and be able to obtain protection from force majeure events in those agreements that do not provide it, (2) such clauses will now include pandemics, shelter-in-place orders and curfews in their list of representative force majeure events, and (3) such agreements will address when, if at all, a force majeure event gives a tenant a right to terminate the lease much the same way a major casualty that is or cannot be repaired after a certain period of time or a co-tenancy failure that continues for a certain period of time gives the tenant a right of exit.
Other Topics. I also expect to see more attention paid to those lease terms addressing premises security, customer health and safety, financial and other reporting, casualty, insurance, quiet enjoyment, guaranties, among many others. Needless to say, the COVID-19 pandemic has permanently altered the course of retail lease negotiations between landlord and tenant. Because such changes will result in greater clarity of each party’s rights and obligations, I believe, in the long run, they will be for the betterment of landlord-tenant relations.
Scott A. Klion is Of Counsel to HBA in the area of commercial leasing. His practice is devoted to the negotiation, preparation, and interpretation of office, retail and industrial leases.